Morrisons - comment
We remain positive about Morrisons. Q3 revenue growth was in line with our forecast, and whilst EBITDA margins were lower than we hoped (4.8% vs 5.4% forecast), they continue to improve sequentially. The company has said Q4 and FY EBITDA will be above last year, which implies the company expects a strong Q4. Morrisons has not yet decided whether to use the £331m cash raised in its ground rent transaction to repay debt or invest in the business. We expect either a repayment of bank debt at par or a sub-par tender for SSNs. We will update our model over the next few days.
Much of the call centred on the £331m ground rent deal. As we said yesterday, the transaction layers the SSNs as the ground rent liability will be structurally senior. The 75 stores have been removed from the restricted group, with a lease arrangement to the TopCo to fund the ground rent. The cap rate is 4% (we had assumed 7%), which implies an annual rent of around £16m. The cost is below the bank debt and SSNs.